This is a reprint of a post on my blog, which you can access here. 

Many Californians are facing escalating loan payments, at a time when home values have retreated and the economy is slowing. For most, the trouble really started a few years back when they refinanced their home. As a result, more borrowers than ever are going delinquent and ending up in foreclosure. While many believe that bankruptcy is their primary or only option, there is an alternative available that most people don't know about.

There is a little-used law that could help many borrowers in this position. The federal Truth in Lending Act, commonly referred to as "TILA," could provide substantial relief for many borrowers (for their principal residence) stuck in the situation described above. The law was originally enacted to ensure that consumers have meaningful access to information about the cost of credit. Under TILA, when a lender violates certain notice requirements related to certain home loans, there are stiff penalties.

First, the borrower is allowed to rescind their loan, and the lender is no longer entitled to any interest, fees, or costs related to the loan, even costs paid to third parties like title insurers and brokers. Instead, every penny paid by the borrower over the life of the loan goes towards reducing the principal balance due on the loan. This is not a typo. Of course, the borrower does have to make arrangements to pay back the remaining principal balance, usually by refinancing or selling the property. But for many owners who currently owe more than their home is worth, this feature can make it much easier to sell or refinance.

Second, once a borrower notifies the lender that they are rescinding the loan, the lender's security interest in the collateral (the property) is voided as a matter of federal law. This means that a TILA violation can stop a foreclosure very quickly.

There are too many special rules that apply to TILA rescissions to cover in this post, but it all starts with the borrower having their loan documents reviewed by an attorney familiar with TILA.